In Japan, Merrill to Form a Joint Venture in Private Banking

By MARTIN FACKLER

Published: September 29, 2005

A year after Citigroup was ordered to shut its private banking operation in Japan, another American financial giant is moving to fill the gap left in this huge but hesitant Japanese market.

On Wednesday, Merrill Lynch announced it would join with the Mitsubishi Tokyo Financial Group, the Japanese megabank, to open a private banking joint venture catering to Japanese individuals who have more than $1 million to save or invest. Private banks offer personalized service and investments to just such wealthy clients.

The venture, which would open in the middle of next year, would be Merrill Lynch's first big push into Japan, the world's second-largest market for financial services after the United States, since the company pulled out of a failed retail brokerage business in 2001 under heavy losses.

''This time, we are trying to approach the client differently,'' Robert J. McCann, president of Merrill Lynch's global private banking operations, said in an interview. ''We're taking a very targeted approach at a particular market segment using a partner with local knowledge.''

The new venture joins a recent rush by global financial companies like the Swiss bank UBS, Standard Chartered of London and Nomura Holdings and Sumitomo Trust of Japan to fill the need left by the exit of Citigroup.

In September 2004, the Financial Services Agency, a Japanese government watchdog, ordered Citigroup to close its private bank here after finding lax money-laundering controls and improper trading practices. Some customers were overcharged for publicly traded derivatives. In other cases, Citigroup brokered real estate and art deals, activities expressly forbidden under Japanese law.

Some of Citigroup's former private bankers said that many of the newcomers, including Mitsubishi Tokyo, had been competing to hire them to build their own operations.

The move also underscores the allure of Japan's extensive but largely untapped private banking market. Merrill Lynch says Japan has some 1.4 million people who have more than $1 million to invest, second only to the United States, which has about twice that many.

Globally, Merrill Lynch says there are about 8.3 million such investors, who collectively hold assets worth $30.8 trillion.

One challenge, analysts say, will be persuading rich and often elderly Japanese to shift money from the safety of bank accounts, which barely pay interest, into riskier but more lucrative investments like stocks and bonds.

Japanese of all income levels are notably conservative investors, having suffered through a stock market and real estate bubble and almost 15 years of tepid economic growth. They have frustrated most previous attempts to develop a wealth management industry here.

''Japan always seems to be the land of opportunity,'' said Jason Rogers, a banking analyst at Barclays in Tokyo, ''but private banking has never been big here. People prefer to manage their own assets, usually in banks.''

Merrill Lynch wants to avoid the mistakes of its last big foray into Japan in 1998, when it tried to attract middle-class savers by taking over the retail network of the failed Yamaichi Securities, once Japan's No.4 brokerage. The effort fell apart after investors proved unwilling to move into mutual funds and securities, where Americans put a big chunk of their savings.

Merrill Lynch kept only the wealthier clients, giving it a private banking presence in Japan of about 8,000 clients with 1 trillion yen, or $8.8 billion, in assets. It said these accounts would be folded into the new joint venture.

Citigroup will not say how big its client base was before it closed, but analysts and bankers say it was probably twice as large as that of Merrill Lynch right now.

Merrill Lynch will own 50 percent of the still unnamed venture, with Mitsubishi Tokyo companies holding the rest. The new company's chief executive will be Junji Okabayashi, a vice chairman and the head of Merrill Lynch's private banking operations in Japan.

Mr. McCann said Merrill wanted to avoid past missteps by affiliating with a strong local partner, which would allow it to reach clients without building a costly sales network.

Mitsubishi Tokyo is to become the world's largest bank by assets on Saturday when it completes a takeover of another Japanese lender, UFJ Holdings. After the merger, Mitsubishi will have more than 800 branches across Japan, which the joint venture can use to reach potential clients.

Mr. McCann said that timing was right for the venture: the recovery in Japan's economy has gained traction and a decade-long banking crisis has ended, allowing Japanese investors to invest with greater confidence.